Early-stage funding refers to investments in fledgling firms that are yet to generate revenues and, in some cases, even customers. Such investment is considered riskier than so-called growth-stage funding where money is put into companies that have a validated business model with some revenues and customers, though they might not be turning in profits.

Some investors said that they are trying to hold back, as opportunities to exit are also looking a lot less predictable than before. This compounds the risks of venture investments, particularly for early-stage funding.

“Some LPs (limited partners, or those who back VC firms) are rethinking their venture exposure strategy and, therefore, there may be less money available for these kinds of investments in the near future," said Subrata Mitra, partner, Accel Partners, a VC firm that typically provides early-stage funding.

Since many new companies are facing problems in sticking to growth and revenue targets, the exit horizons for investments have also been pushed back from about three years in 2007 to five-seven years now, said investors.

According to Samir Kumar, managing director of early-stage venture firm Inventus Capital Partners, one reason for this relative lack of early-stage investors compared with later-stage investors is the background of the people in private equity.

“In India, you have more investors who come from financial backgrounds as compared to operating or entrepreneurial ones," he said, adding that early-stage investing is an area that requires a fair amount of operating knowledge so that such investors are able to work closely with an entrepreneur.

This contrasts with the deeper financial skills that are required in later-stage investing. “It is only in the last few years that we’re seeing investors with operating and entrepreneurial backgrounds enter the venture capital industry," Kumar said.

Investors have also said that they are spending a lot more time and additional capital to keep current portfolio companies in reasonable condition and, therefore, have less time and money for new investments.

“Now, when the markets are choppy, we have to be cautious and preserve cash for making sure investments are made in companies that can sustain themselves," said Sudhir Sethi, chairman and managing director of IDG Ventures India, an early-stage VC firm.

Companies, on the other hand, are complaining that they are being made to wait for months with no assurance on funding.

“I have been approaching various people. They always ask us to come back with one or the other thing—a clear path to revenue generation or a few key customers," said the chief executive of a mobile value-added services firm, who didn’t want to be named. The firm is looking at launching its product in the market.

Investment bankers say investors are becoming stricter with their criteria for considering an investment, which has lengthened the process of raising capital.

“The caveat stressed is only if your company is generating this much revenue, or do you have five key customers," said Deepak Srinath, co-founder, Viedea Capital Advisors Pvt. Ltd, a Bangalore-based investment bank. Investors are also asking for stronger and more rigorous data than before, Srinath said.

IDG Ventures said the bar will remain high and won’t be lowered any time soon.

Conditions are not likely to improve in the near term for early-stage investing. “As the sentiment improves, we may see a partial lift, but I would be surprised if we are able to recover in less than 12-18 months," said Alok Mittal, general partner, Canaan Partners.

To be sure, there have been a few deals in fledgling firms. These include Accel Partners India investing $2.5 million (Rs12.17 crore) in Rx HealthCare Magic, which runs a website, HealthcareMagic.com; Ojas Venture Partners investing an undisclosed amount in Delhi-based management consulting firm CoCubes; Canaan Partners investing an undisclosed amount in mCarbon, a New Delhi-based mobile value-added services company; and Inventus Capital investing $1 million in Insta Health Solutions Pvt. Ltd, a Bangalore based start-up that provides SaaS (software as a service) solution to hospitals.

Mittal also said that funds that raised money in 2006-07 and would have gone out to raise a new fund in 2009-10 may drop the pace of investments to make their corpus last longer as the fund-raising climate is not optimal and may get delayed or shrink. “We raised money in 2008 (and) still have large amount of that left to be invested; our pace of investments was moderate, something we can maintain with normal investment cycles in typical funds," he said. In spite of the need for early-stage funding, such investments will be hard to garner, at least for now.

Said IDG Ventures’ Sethi: “Our responsibility is to make sure that our investor’s capital gets fully optimized and that they get maximized returns. If we need to be silent for a year, we will remain silent."